Merkel in the Minority

ATHENS—The European austerity caucus led by German Chancellor Angela Merkel is coming apart, but Germany retains the power to block the newly forming coalition for growth as a solution to the eurozone crisis. Tonight’s summit dinner in Brussels is unlikely to produce a breakthrough.

But what a difference an election makes. Since Francois Hollande was elected President of France less than three weeks ago, leaders that had been bullied into siding with the Germans are breaking loose.

Here in Greece, reckless talk by leaders of the European Central Bank that they might not back Greek banks if Greece tried to walk away from the terms of the austerity deal led to runs on Greek banks. Greek citizens lined up at ATM machines to convert their savings to cash before Greece was pushed out of the euro.

Last week, that loose talk ended. ATM machines are quiet. The ECB promised that it would get some $25 billion euros to the banks, more than the amount that had been withdrawn in panic. Greek banks will now be guaranteed by the ECB pending election of a new government here in June, and the beginning of new negotiations on the debt.

Another intriguing straw in the wind: The Organization for European Cooperation and Development (OECD), whose economists ordinarily parrot (and helps staff) the conventional wisdom, has gone rogue.

At the annual ministerial conference of the OECD this week in Paris, their chief economist, Pier Carlo Padoan, shocked the assembled leaders by backing Francois Hollande’s call for euro bonds, which would relieve the burden of Greece and other stressed nations directly. “We need to get on the path towards the issuance of euro bonds sooner rather than later,” Padoan told a disbelieving audience.

Christine Lagarde, chief of the International Monetary Fund, has joined the call for mutual fiscal relief for struggling EU members. Gone are the calls from senior German leaders to just push Greece out of the eurozone and to try to build a “firewall” around Spain, Portugal, and Italy. There is growing awareness that the panic would spread to the next weakest country, as happened when the U.S. Treasury tried to just let Lehman Brothers collapse when the crisis began in September 2008.

All this is the sound of a consensus cracking. But Europe is a long way from a new consensus.

Here in Greece, leaders talk of a grand bargain where the EU and the IMF relent from their demands of crushing austerity, and in return, the Greeks get serious about modernizing their encrusted bureaucracy and economy. But this, above all, will take time. And it is hard to persuade a beleaguered citizenry to give up the dysfunctional protections that they have in exchange for only more belt-tightening.

Tonight’s summit is likely to produce a change of direction and rhetoric—and the salutary isolation of Ms. Merkel. But it will take a great deal more to pull Greece back from the brink of catastrophe and pull Europe out of an incipient and entirely needless depression.